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Strong Australia CPI to Bolster AUD/USD Outlook Ahead of RBA Meeting

Strong Australia CPI to Bolster AUD/USD Outlook Ahead of RBA Meeting

2016-10-25 19:00:00
David Song, Strategist
Share:

- Australia Consumer Price Index (CPI) to Uptick for First Time Since 4Q 2015.

- Core Rate of Inflation to Hold Steady at Annualized 1.7% for Third Consecutive Quarter.

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Trading the News: Australia Consumer Price Index (CPI)

A pickup in Australia’s Consumer Price Index (CPI) accompanied by stickiness in the core rate of inflation may bolster the near-term outlook for AUD/USD as it dampens market speculation for additional monetary support.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Signs of sticky price growth may encourage the Reserve Bank of Australia (RBA) to preserve the current policy throughout the remainder of the year, and Governor Philip Lowe may largely endorse a wait-and-see approach going into 2017 as the economy continues to ‘grow at a moderate rate.’ However, a dismal CPI print may fuel bets for another 2016 rate-cut as the RBA expects the low-inflation environment to ‘remain the case for some time,’ and the central bank may increase its efforts to weaken the local currency as ‘an appreciating exchange rate could complicate’ the rebalancing of the real economy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

NAB Business Confidence (3Q)

--

5

Consumer Inflation Expectation (OCT)

--

3.7%

Retail Sales (MoM) (AUG)

0.2%

0.4%

The uptick in business confidence paired with the pickup in private-sector consumption may boost consumer prices, and signs of stronger inflation may trigger a bullish reaction in the Australian dollar as it provides the RBA with greater scope to move away from its easing cycle.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Employment Change (SEP)

15.0K

-9.8K

Private Sector Credit (YoY) (AUG)

5.9%

5.8%

Gross Domestic Product s.a. (QoQ) (2Q)

0.6%

0.5%

However, easing job growth along with the slowdown in private lending may drag on the headline as well as the core rate of inflation, and a dismal development may curb the appeal of the higher-yielding currency as it fuels bets for lower borrowing-costs.

How To Trade This Event Risk(Video)

Bullish AUD Trade: Australia 3Q CPI Climbs to 1.1% or Greater

  • Need green, five-minute candle subsequent to the print for a long Australian dollar trade.
  • If market reaction favors a bullish aussie position, buy AUD/USD with two separate lots.
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bearish AUD Trade: Inflation Report Disappoints

  • Need red, five-minute candle to consider a short AUD/USD trade.
  • Carry out the same setup as the bullish aussie trade, just in reverse.

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created UsingTrading View

  • Broader outlook for AUD/USD remains constructive as the pair largely preserves the ascending triangle formation from earlier this year, with the Relative Strength Index (RSI) highlighting a similar dynamic; break/close above the Fibonacci overlap around 0.7730 (61.8% retracement) to 0.7770 (61.8% expansion) raises the risk for a topside break.
  • Interim Resistance: 0.7835(2016 high) to 0.7860 (61.8% expansion)
  • Interim Support: 0.7442 (September low) to 0.7450 (38.2% retracement)

Check out the short-term technical levels that matter for AUD/USD heading into the report!

Impact that the Australia CPI report has had on AUD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

2Q 2016

07/27/2016 01:30 GMT

1.1%

1.0%

-55

-64

2Q 2016 Australia Consumer Price Index (CPI)

AUD/USD 10-Minute Chart

AUD/USD Chart

Chart - Created UsingTrading View

Australia’s Consumer Price Index (CPI) slowed more-than-expected in the second-quarter, with the headline reading narrowing to an annualized 1.0% from 1.3% during the first three-months of the year, while the core rate of inflation unexpectedly held steady at annualized 1.7% for the second straight quarter. In turn, the Reserve Bank of Australia (RBA) may come under increased pressure to further embark on its easing cycle as the central bank struggles to achieve the 2 to 3 percent target-band for inflation. The Australian dollar struggled to hold its ground following the weaker-than-expected CPI print, with AUD/USD slipping below the 0.7500 handle to end the day at 0.7489.

Get our top trading opportunities of 2016 HERE

Read More:

EUR/CAD Rebound or Reversal? Line-in-the-Stand at 1.4600

USD Breakout – Does it Have Room to Run?

Gold Price and Oil See Headwinds as USD Strongest Since February

Forex Technical Focus: Range Highs for Nikkei; USD/JPY Lags

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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